Rise in pledged shares by promoters puts Dalal Street on the edge

Promoters of India Inc continue to rely heavily on share pledging to raise debt for funding their core and non-core business activities. According to the data analysed from Capitaline, the promoters pledged more than Rs 1.2 trillion worth of shares in 2018-19, 60 per cent higher than the previous year’s tally.

So far in 2019, more than Rs 16,000 crore worth of shares has been pledged by the promoters. The data analysis takes into account the value of shares reported by the listed companies to the exchange as part of their pledge creation disclosures.

Industry observers say structured deals, involving loans against shares (LAS), have led to a spurt in share pledging. Domestic mutual funds (MFs) are active participants in such deals with their exposure ranging between Rs 25,000 crore and Rs 30,000 crore.

Sources say such deals have come under the scanner of the Securities and Exchange Board of India (Sebi), which is engaging market players to assess the wider risks for the market.

“While pledging is an easy and quick way of raising money, it is not the most ideal route. We can see the risks of high levels of promoter pledging play out in the market right now, which has put both the borrower and lenders using this route at risk,” said Pranav Haldea, managing director of Prime Database.

The rise in the value of pledged shares could also be due to the margin calls getting triggered as the heavily-pledged companies have seen sharp sell-off.

“Most of the leveraged companies have seen sharp erosion in their share prices. Also, the promoter pledging is quite high in the mid- and small-cap stocks. These stocks have corrected 30-50 per cent in the last few months, which must have triggered margin calls,” said G Chokkalingam, managing director, Equinomics Research and Advisory.

The data shows that promoters of mid- and small-cap companies’ have pledged more than Rs 77,000 crore worth of shares in FY19, which accounted for 62 per cent of the total value of the promoter shares that got pledged in the same period. The rise in promoter pledging not only poses higher risks for lenders and borrowers, but also puts the minority shareholders at a disadvantage, say experts.

“The rise in promoter pledging shows how the lines between promoters’ personal wealth and shareholders’ wealth in promoters’ listed companies is blurring. This is a worrying trend from the standpoint of governance standards within corporate India,” said Amit Tandon, founder and managing director of Institutional Investor Advisory Services.

With markets expected to remain volatile, promoters and lenders exposed to the industrials and materials space can face brunt of the price erosion of the pledged shares.

According to an Edelweiss note, promoter pledges in industrial and material space are highest at Rs 48,100 crore and Rs 38,700 crore, respectively.

Recently, the LAS structures involving companies belonging to the Anil Ambani Reliance Group and Essel Group had gained spotlight with the lenders reaching an agreement with the promoters that the former would not invoke the pledged shares.

According to analysts, further fall in value of the shares pledged as collateral could lead to downgrade of the debt instrument and impact net asset values of the mutual fund schemes.